Will Abe's 'supermajority' lift Japan?

By Clive Hale, director, FundCalibre

Added 14th July 2016

Whilst we've all been focused on Murry vs Raonic, May vs Leadsom, Hamilton vs Rosberg and Corbyn vs Eagle, something quite exciting happened in Japan this weekend: Shinzo Abe won a sweeping victory in Japan's upper house elections and now holds a 'supermajority' that supports a constitutional revision.

Will Abe's 'supermajority' lift Japan?

He's in undisputed control of Japanese politics and has a once-in-a-lifetime opportunity to – wait for it – put consistutional change to a national referendum.

Abenomics started three and half years ago and early euphoria has somewhat waned in recent months. Many people feel that his policies have failed and, if you judge him in terms of meeting the targeted 2% inflation, he has. But his policies have delivered a degree of price stability and a number of other good things along the way: improving corporate profits (earnings have risen each year since Abenomics started), increased dividends and better corporate governance, to name a few.

It was never going to happen overnight, but even Abe acknowledges that people need to believe in him again and, following his victory this weekend, one of the first things he said was: “We have to accelerate Abenomics to meet the public’s expectations.”

The market, at least on the face of it, has reacted positively. The Nikkei was sitting on important support at 15,000 on Friday and “exploded” upwards on the news Monday - getting just shy of 16,000. However, as has been reported, the catalyst that sent the Nikkei soaring and yen falling was perhaps not the landslide victory itself but Abe's announcement that more stimulous may be on the way.

By all normal rules, the yen should be flat on its back given Japan’s negative interest rates and bond yields, but so far this year it has appreciated against the US dollar by 20%. It has fallen to Y102.40 this morning, which is more good news, as it will help Japanese exporters regain some competitiveness. China has been quietly devaluing the yuan, whilst all the attention is on post-Brexit machinations, and Japan needs to do a bit of catching up.

In addition to all of this, there are some extraordinarily cheap stocks on offer and I would not be surprised to see a decent rally from here. If the index can make it above 18,000 then we could see the high of 21,000 a year ago surpassed.

The likes of Elite Rated Baillie Gifford Japanese and Schroder Tokyo, two of my favoured Japanese equity funds, have been performing well and should continue to do so. And if the yen continues to weaken it will help Neptune Japan Opportunities, which is permanently hedged, and has been battered in currency terms over the past 12 months.

Past performance is not a reliable guide to future returns. You may not get back the amount originally 

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